Richard Murphy: How Tories are exacerbating the signs of a looming recession

IN 1759 the world’s first recognised economist – the Scotsman Adam Smith – wrote that however selfish we might think people to be, the evidence is very strong that the happiness of other people is really important to people’s own wellbeing.

That’s true even if the other person’s wellbeing has no direct impact on the person who is observing it. What he suggested is that, to put it quite straightforwardly, all normal people care about what happens to the other people who around them, whoever they are.

This is a lesson that modern economics has forgotten.

What modern economists look at is financial data. They measure national income, profits and all sorts of other numbers, most of which is only known about well after the events to which it refers have happened. None of that scrutiny helps us very much when it comes to working out what is really happening in the economy right now, which is what most of us want to know.

UK Chancellor Rishi Sunak is due to deliver a budget in a fortnight's time

Most especially, what is happening now is what economic decision makers need to know when they are setting things like interest rates. This is vital right now when there is speculation on whether or not interest rates will rise in response to current inflationary pressures as a result of food, road fuel and energy shortages.

It turns out there is a way to find out what is happening now. What you do is ask people.

My good friend, Professor David Blanchflower of both Dartmouth College in the USA and the University of Glasgow (who is always known as Danny for reasons those old enough will appreciate) calls this "the economics of walking about".

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It’s something both he and I do. I reckon my barber knows about as much about the economics of what’s happening in my locality as anyone I could ask. Danny uses latest data on surveys of how people feel. Our assumption is the same. What we realise is that people seem to instinctively know what is really happening in the economy a long time before the decision makers do.

Right now, people are sending out some pretty poor signals about how they think the economy is going. They are queuing for fuel because they do not trust the government. They are not spending as much as forecasters at the Bank of England expected. People aren’t moving jobs to take the many vacancies that supposedly exist because they knew that in March 2020 those who had just moved jobs suffered badly when lockdown began.

I see endless weary messages from parents on social media frightened about their children's health. And in city centres sandwich sales are still well down – because people are simply not taking the risk of returning to work. What is more, the Institute of Directors is reporting that the confidence of its members is beginning to plummet. When it already looks like Christmas is in trouble, that’s unsurprising.

If you walk about, listen carefully, and take note of all this, the economic signs heading into 2022 are really not good. This is relevant. Surveys on sentiments on issues like those I note have, so Danny has found in his academic work, predicted all recent recessions. What is more, they have never predicted a recession that did not happen.

And the signs are that one is on its way now.

What does that mean for us at this moment? Quite scarily, we face a budget from Rishi Sunak in two weeks time that is widely predicted to be bringing back austerity. That will have the deliberate intent of reducing economic activity by the government.

At the same time the Bank of England is talking about increasing interest rates. That is a move designed to have exactly the same effect, by supposedly reducing upward pressure on prices in the economy by reducing demand for goods and services. In other words, just when people think recession is already likely, the government and the Bank of England are planning to take action that will make the real downturn that people’s own behaviour is predicting very much worse.

Why are they doing that when it is obviously the wrong thing to do? It is because they aren’t listening. And that is because they have forgotten that very first lesson in economics that Adam Smith gave in 1759. He said that caring about other people’s wellbeing matters. There is little sign that the Westminster government does that. And so just as people’s worries about the economy are growing, the government and Bank of England are planning to make things worse.

If only they walked about a bit more – and left the protection of their minders - they might realise what a catastrophic error they might be making. But I fear that they won’t do that. As a result a more serious downturn in 2022 looks very likely when that is completely unnecessary.